ContractsProf Blog

Sid DeLong, The Rainmaker's Case

The Rainmaker’s Case
(and the Aleatory Contingency Fee Scam)

Sidney W. DeLong

When lawyers hear the word “rainmaker,” they think of a partner in a law firm who makes his money by attracting high-paying clients to the firm. He often assigns their legal work to his partners and associates, whose work earns the firm’s income. But don’t feel sorry for them: a good rainmaker can be worth his weight in gold to his partners, whose net earnings would dwindle without him.

The term “rainmaker” in such a case is metaphorical, referring to tribal magicians who are believed to produce rain by propitiating the gods. The recent devastating floods in drought-stricken California reminded me that “rainmaker” used to have a more literal meaning. A little over a century ago, while California was enduring yet another prolonged drought, an enterprising sewing machine salesman named Charles Mallory Hatfield invented what he claimed was a new, scientific method of making rain. Hatfield sold his services as a “pluviculturist” to several California municipalities under a series of contingency fee contracts in which he would be paid only for producing rain in agreed-upon amounts. The following version of his story can be found here.

In 1915, Hatfield entered a contract with the city of San Diego to produce enough rain to fill the nearby Morena Dam Reservoir. Under the terms of the deal, Hatfield would be paid $1,000 per inch of rain produced between 40 and 50 total inches. He would receive nothing for rain up to 40 inches, which the parties apparently assumed would fall without artificial assistance. He also would receive nothing for rain above 50 inches, which was apparently all that the city needed. The contract provided that the $10,000 fee was payable only when the reservoir was filled.

Hatfield put his mechanism into action and on January 5,1915 it began raining. And raining. And raining. Thirty inches fell in January alone. The rain not only filled the reservoir but caused devastating flooding, which broke a dam and caused millions of dollars in damage. “Hatfield’s Flood” ultimately claimed 50 lives. Pleas to Hatfield to call off the rain were ignored because he was helpless to do so. Instead of calling it off, he doubled-down, promising to provide yet more rain!

Après le deluge, Hatfield confidently claimed his $10,000 fee. The city of San Diego contested the claim. The city denied liability on the oral contract on several grounds. It also counterclaimed against Hatfield for $3.5 million in damages resulting from the flood.

These offsetting tort and contract claims created a perfect legal stalemate. The city could not lose: Either Hatfield was a fraud and did nothing to earn his fee (the rain having fallen without his assistance) or else he did cause the rain and so was liable in tort for the resultant flood damage as an intentional or negligent trespass. Hatfield likewise could not lose: either he earned the fee or else he was not liable because he did not cause the flood. Because neither party could lose, neither could win. The court reportedly held that the rain was an Act of God (not an Act of Hatfield), and so denied both the contract claim and the tort counterclaim. The only rainmakers to make money from the case were the lawyers.

The Rainmaker’s Case resonates with the dark folklore of contract, myths rooted in fears of rash promises and unintended consequences. One trope involves the consequences of breach of a promise to pay for supernatural services. Compare the people of San Diego with the citizens of Hamlin, who made a deal with the Pied Piper to pay for the extermination of the plague of rats. When they refused to pay as promised, he spirited away their children. When the city refused to pay as it had promised, Hatfield punished their breach of contract with more deadly rain.

Or perhaps Hatfield suffered the fate of the Goethe’s Sorcerer’s Apprentice, a role played by Mickey Mouse in the 1940 Disney movie Fantasia. Left to manage the sorcerer’s workshop while his master was away, Mickey wielded magic that he did not understand in order to get his water-carrying chores done by an animated broom, He found himself unable to utter the magic spell that would stop an army of implacable, bucket-carrying brooms from flooding his master’s workshop. The master returned just in time to regain control and the apprentice was duly chastened. Perhaps like Mickey Mouse, Hatfield learned the risks of tampering with the elemental forces of nature. When you mess with Mother Nature, always have a safe word.

Moving from myth to more mundane matters, the Rainmaker’s deal illustrates one of the oldest cons in the book, what I call the Aleatory Contingent Fee Scam. It works like this: Suppose someone approaches you in a casino and, recognizing that you are a novice, makes you the following offer: “I will give you guaranteed roulette wheel betting advice for a fee: If you lose a bet following my advice, you pay me nothing. If you win, you pay me 10% of your winnings.” Hatfield offered rainmaking services to San Diego on exactly the same basis. The city got his services for free if it didn’t rain, while he got paid up to $10,000 if it did.

I trust the reader can see that it would be foolish to agree to pay an aleatory contingency fee on the basis of a chance event. The key to the scam is that the payee cannot influence the contingency and simply rides along on the payor’s good fortune when it occurs.

The reader may be inclined to think that no rational person would agree to an Aleatory Contingency Fee Scam. The reader would be wrong. Consider corporate executive compensation contracts that reward CEO’s with vast bonuses payable on the contingency of stock price movements that the CEO’s may have had little or no hand in influencing. If it doesn’t’ rain, they get nothing. But if it rains, they get rich; and the corporation takes a bath.

Universities in New Jersey Are Immune from COVID Suits

This one starts out like many other cases we have covered in which students sue their universities for switching to remote learning in March 2020.  Plaintiffs in Mueller v. Kean University, students at New Jersey universities, sued alleging breach of contract, unjust enrichment, conversion, or money had and received.  Plaintiffs sought to recover part of the tuition and fees they paid on the ground that the education they received did not conform to their expectations. 

However, this case goes differently because of New Jersey's Emergency Health Powers Act (EHPA). which rendered the universities immune to suit because they acted in compliance with the New Jersey governor's executive orders relating to the COVID pandemic.  The governor issued a series of executive orders between March 16th and 21st that ordered all institutions of higher learning within the state to cease in-person operations.  

Kean University conceded that the online education it provided to students during the Spring 2020 semester was "inherently different" from in-person learning and that it charged more for in-person education than for online programs.  Nonetheless, it refunded only room and board fees but not tuition or other fees, claiming that the EPHA rendered it immune to suit.  The trial court agreed. 

Montclair State University argued both that it was immune to suit and that it had not breached any contractual obligations, having found a way to continue offering educational services to students through online programs.  Here too, the trial court dismissed the complaint based on immunity under the EPHA.  

On appeal, plaintiffs argued that the EPHA immunizes the universities only with respect to liability for "injuries," suggesting that they cannot be sued in tort but that contracts claims may proceed.  The court rejected this argument, noting that the EPHA exempts entities for harms to "property" and defines property to included, among other things, money.  As a result, the court concluded, the EPHA also immunizes the universities against contracts claims.  No action by the universities suggested that they had waived their immunity.

Finally, plaintiffs argued that giving effect to the EPHA in this way violates the constitutional prohibition on state impairments of contracts.  But that constitutional provision has been construed to permit state adjustment of contracts pursuant to the state's general welfare powers.  Plaintiffs did not argue that either the executive orders at issue or the universities' decisions to shut down were unreasonable or unnecessary, and so they did not meet the standard for a contracts clause challenge.

Contracts and the Death Penalty in Georgia

Last week, the Georgia Supreme Court provided evidence (if readers of the blog needed any) that contracts can be a life or death matter.  The case, Georgia v. Federal Defender Program, began when a death row prisoner, Virgil Delano Presnell, Jr., filed a breach of contract claim against the state, for failure to abide by a promise made by the state and its attorney general relating to the suspension of execution proceedings during the COVID pandemic. 

Specifically, the agreement, communicated in an e-mail, stated:

Our office will not pursue an execution warrant from the District Attorney in the below defined cases before: 1) the final COVID19 judicial emergency order entered by the Chief Justice of the Supreme Court of Georgia expires; 2) the Georgia Department of Corrections lifts its suspension of legal visitation, and normal visitation resumes; and [3)] a vaccination against COVID19 is readily available to all members of the public.

The Attorney General's office promised not to pursue an execution warrant until six months after the three above-named conditions were met.  And then, one-year later, the state issued an execution order for Mr. Presnell, whose case was indisputably subject to the e-mail referenced above, before two of the three conditions had been met.  

Georgia argued that the e-mail agreement could not be enforced against it without violating sovereign immunity, but the trial court found that the e-mail itself constituted a waiver of sovereign immunity.  Georgia's Supreme Court agreed.  Its discussion might serve as a useful teaching vehicle for those who want to cover electronic signatures.  

The Supreme Court first established that the was no per se rule that Georgia could not waive its sovereign immunity in an e-mail.  Next, there was the trickier issue of whether Georgia had agreed to be bound by electronic signatures in this case, as required under the Georgia Uniform Electronic Transactions Act (GUETA).  The court looked at the context of the parties' interactions and concluded that the state had consented to be bound by electronic means, satisfying GUETA.  The state tried to contend that, in contracts involving the state, certain formal requirements must be met, and the state must explicitly state that it is agreeing to be bound in electronic form.  The Supreme Court found nothing in the statute creating special rules for contracts involving the state.  The only requirement is that the agreement at issue be a "transaction," as defined in GUETA, which this undoubtedly was. "Transaction" is defined to include agreements involving state entities.  

Georgia next argued that even if it could waive its immunity by e-mail and even if it had agreed to be bound by electronic form, the e-mail in question was not signed.   The Supreme Court did not buy it.  GUETA provides broad guidelines for what constitutes a signature.  Here, where an agent of the attorney general with proper authority manually typed her name into an e-mail from her government account, she signed on behalf of Georgia, and Georgia was bound.  Another agent of the state confirmed and thus ratified the agreement. 

Going down swinging, Georgia argued that the agreement was unenforceable because it lacked consideration.  The Supreme Court noted that the consideration requirement is easily met.  Here, plaintiffs agreed to be bound by the e-mail in exchange for giving up their efforts for a more complete resolution through legislation addressing all of the issues surrounding the challenges related to capital defense during COVID. 

The Supreme Court wasted little time dismissing Georgia's argument, raised for the first time on appeal, that the argument was unenforceable because vague.  There were other arguments relating to injunctive relief, but there the state fared no better than it had with its contractual claims.

It took the majority no less than 87 pages to address all of Georgia's arguments for why it should not be bound by its electronic agreement with the plaintiffs.  In a short concurrence, six Justices noted the state motto: "Wisdom, Justice, Moderation."  The state's conduct in this matter, the concurring Justices noted, could breed cynicism.  "Government is often an accidental vector of our society’s cynicism," the concurrence noted.  "It really should avoid being an intentional one." 

"[T]he State should keep its promises," the concurrence continues, "because The People of Georgia, who are the very source of the State’s sovereignty, are owed a government that honors its commitments."  The Justices regretted that anybody in state government thought it appropriate to ask that the government be excused from doing so. 

It's a peach of an opinion and a dandy concurrence. 

Cour de Cassation Vacates $15 Billion Arbitral Award Based on International Public Policy

This decision in Belokon v. Kyrgyzstan is from March 2022, but we just got wind of it care of Roslyn Lai and Charles Ho Wang Mak's publication in on the American Society of International Law Website last week.  The ruling is significant because it demonstrates the willingness of even pro-arbitration jurisdictions like France to consider materials not available to the arbitral tribunal.  In this case, the court determined that upholding the award would have enabled the investor to profit from money laundering.

Cour de Cassation
Image by Arushi0880, CC BY-SA 4.0 via Wikimedia Commons

The case arises out of Kyrgyzstan's actions agains the Manas Bank, in which Mr. Belokon, a Latvian national, had invested, in 2010.  Mr. Belokon brought a UNCITRAL action in 2010.   When the arbitral award was rendered in 2015, Manas Bank was insolvent.  

In the arbitration proceedings, Kyrgyzstan presented evidence that the bank was engaged in money laundering, but the arbitral body did not find the evidence sufficient.  It noted that, had Kyrgyzstan presented substantial and probative evidence of money laundering, it might not have ruled in Mr. Belokon's favor.  

Kyrgyzstan challenged the award before the Paris Court of Appeal, which found substantial evidence that the award would enable Mr. Belokon to profit from money-laundering activities.  Mr. Belokon appealed to the Cour de Cassation, arguing that the Paris Court of Appeal exceeded its authority in considering facts not presented to the arbitral tribunal.  The Court de Cassation found that the public policy anti-corruption interest in this case outweighed the public policy interest in the finality of arbitral decisions.

Cour de Cassation Building
Image by Daniel Vorndran / DXR, CC BY-SA 3.0, via Wikimedia Commons

The scope of the decision is unclear.  Based on the authors' summary of the case, it is hard to tell whether the relevant evidence was unavailable to Kyrgyzstan at the time of the arbitration or if it simply neglected to present it.  One would think that difference ought to matter.  In addition, it is not clear how a reviewing court should weigh the public policy interest in ferreting out corruption against the public policy interest in the finality of arbitral decisions.  In this case, the Cour de Cassation was persuaded that enforcing the decision would enable Mr. Belokon to benefit from money-laundering and apparently it was convinced the the arbitral tribunal, if presented with the evidence it had before it, would have refused Mr. Belokon's demand for compensation.

The Buffalo Billion Case in SCOTUS: Ciminelli v. United States

Once again, Will Baude and Dan Epps' Divided Argument podcast has alerted me to a SCOTUS case with contract implications of which I was previously unaware.  Those of you who are not interested in a listener's phone message featuring a song set to the tune of "Old McDonald" that alleges that Will Baude engages in "unpersuasive scholar trolling" or in the latest news about Justice A-leako (thanks for that one Strict Scrutiny Podcast) can skip to minute 36.  

The SCOTUS case is styled Ciminelli v. United States.  My recitation of the facts is indebted to the Second Circuit opinion in the case, which is styled United States v. Percoco.  The case should be of interest to those of us who cover the bid cases in first-year contracts courses.  The students can really understand those cases only if they understand a little bit about how bids on public construction projects operate.  In order to make it impossible for parties to bid shop, bid chop, or otherwise rig bids on public contracts, subcontractors (subs) are required to submit sealed bids to general contractors (GCs).  The GCs open the bids and often on the same day use the unsealed bids to put together their own bids, which are also sealed.  Bid cases arise when the subs try to retract erroneous bids that the GCs have relied on in putting together their bids.  Following Justice Traynor in Drennan v. Star Paving, unless the bid is obviously the product of a mistake, the Restatement approach treats the subs' bids as irrevocable based on the GC's reliance.  

Did I say that sealed bids make cheating impossible?  Apparently not.  I blogged recently about Victor Goldberg's work, showing that parties can contract around the common law option created by Drennan.  But Ciminelli involves a must more creative (and probably fraudulent) scheme.  Simplifying the facts, the defendants in Ciminelli/Percoco allegedly colluded to rig the bid materials so that preferred contractors would win bids.  The main author of the scheme set up intermediaries that were not a part of the scam.  He then contacted preferred contractors and gathered information about their businesses.  The requests for proposals, (RFPs) one for Syracuse and one for Buffalo (known as the "Buffalo Billion") were then tailored so that only the preferred contractors would qualify.  The scheme worked.  In both Syracuse and Buffalo, the innocent intermediary entity awarded lucrative contracts to the preferred contractors.  

The issue before the Court is whether defendant can be liable for fraud when the state has not proven that it was harmed by the defendant's conduct.  That is, defendants claim that they were indeed the most qualified bidder, and there is no allegation that the state overpaid for the work done or that the work was not competently completed.  The Second Circuit found criminal liability based on defendants' fraudulent interference with the state's "right to control."  Right to control violations occur whenever a scheme denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.

In his Petition for Certiorari, Ciminelli attempts a frontal assault of on the right to control theory:

Whether the Second Circuit’s “right to control” theory of fraud—which treats the deprivation of complete and accurate information bearing on a person’s economic decision as a species of property fraud— states a valid basis for liability under the federal wire fraud statute, 18 U.S.C. § 1343.

In the appeal to the Second Circuit, defendants argued that the issuer of the RFP was not harmed "because the rigged RFPs merely awarded [defendant-controlled entities] preferred developer status, and did not affect the terms of the separate, subsequently negotiated development contracts."  Defendants also claimed that the government had not identified other parties offering "lower prices, better quality, or better value would have applied and been selected for either the Syracuse or the Buffalo contracts."

As to the first argument, the Second Circuit found that being named preferred developers made it much more likely that they would be awarded contracts, and so the fraud was relevant to an "essential element of the bargain."  That element of the fraud claim is thus satisfied.

As to the second argument, the "right to control" theory requires no showing of economic harm.  The deprivation of the right to control itself entails a violation of a property right.  As the Second Circuit held in Lebedev, "Since a defining feature of most property is the right to control the asset in question, . . . property interests protected by the wire fraud statute include the interest of a victim in controlling his or her own assets." In Finazzo, the Second Circuit clarified that the right-to-control theory requires proof only that "misrepresentations or non-disclosures can or do result in tangible economic harm" (emphasis mine).  

According to Will Baude and Dan Epps, nobody is defending the Second Circuit's "right to control" theory of fraud.  The case is likely to be remanded to see if the government can find an alternative basis for a fraud conviction.

I haven't looked into the law or the briefs on the case, but my instinct is to think that's a shame.  Based on the facts below, fraud has clearly occurred.  Determining whether anybody was harmed would require speculation about what might have happened had the RFPs not been rigged.  The state may have been harmed because there might have been lower bidders.  There is no way to prove that.  Other bidders might have been harmed because, but for the rigged RFPs, they might have bid and won.  But none of them bid, so it is unclear how any of them would have legal standing to allege that they were the victims of defendant's fraudulent misconduct. 

In an era less hamstrung by the Court's commitment to blinkered legal formalism, the government could make the case that, absent a "right to control" theory, there will be no remedy for the kind of fraudulent conduct alleged in this case. Perhaps the Court's expansive view of property rights will motivate it to embrace "right to control" theory sua sponte.   This case clearly involves a fraudulent scheme.  It was successful, and the perpetrators profited substantially.  The public likely paid too high a price for the services provided, but the extent of the harm is not provable with reasonable certainty.  Defendants' competitors were harmed, but they cannot prove it because the carefully crafted RFPs deterred them from bidding.  Who cares? Prophylactic rules may be over-inclusive in order to deter bad behavior.  The Court could uphold a broad rule intended to capture intentional cheating in the competition for public contracts.

 

At It Again: The First Amendment and Contracts

This week, I am putting the finishing touches on a law review article that grew out of this blog post.  The article is the first in a planned series of articles in which I attempt to channel  Jamal Greene's How Rights Went Wrong and argue that First Amendment rights are not absolute and that contractual rights and interests should also play a role in adjudication of constitutional disputes.  I think our current First Amendment jurisprudence provides too much protection for dumb speech and thus renders insipid the values that the Constitution is supposed to protect.  In short, I'm a jerk who doesn't support free speech.

But not really.  I favor full-throated protection of political speech, and the Eighth Circuit has provided me a chance to prove it!  The case is Arkansas Times, LP v. Waldrip.  The Court, sitting en banc, upheld Arkansas Act 710 (Act 710), which requires that contractors seeking to work with the state provide a certification that they will not participate in a boycott of Israel.  All parties seeking contracts with the state in excess of $1000 must provide a certification. If contractors refuse to file a certification, they can only be awarded a contract if their bid is 20% lower than the lowest certifying business.  The Arkansas Times challenged the certification on First Amendment grounds, and I would have sided with the Arkansas Times, as did lone dissenter, Judge Jane Kelly.  

In N.A.A.C.P. v. Claiborne Hardware Co., 458 U.S. 886 (1982), the Supreme Court found that the state violated the First Amendment when it prohibited peaceful political activity, such as that involved in the NAACP's boycott of businesses owned by whites.  The Arkansas Times argued that Claiborne governed its case. 

Arkansas instead relied on Rumsfeld v. Forum for Academic & Institutional Rights, Inc. (FAIR), 547 U.S. 47 (2006), in which the Court held that First Amendment protection does not extend to non-expressive conduct.  In FAIR, law schools denied military recruiters access to their campuses to protest the "don't ask, don't tell" policy.  Congress responded with the Solomon Act, denying federal funds to schools that closed their campuses to military recruiters.  In a baffling bit a sophistry, the unanimous court found that the First Amendment was not implicated in the law schools' challenge to the Solomon Amendment because the law schools' message was too unclear.  Conduct that needs to be explained to a neutral observer in order for its political content to be understood gets no First Amendment protection.  

Guess what!  The Eight Circuit, sitting en banc, found that contractors that refuse to sign Act 710 certifications engaged in non-expressive conduct.  The boycotts at issue in Act 710 are nothing like the boycotts at issue in Claiborne! It somehow reaches that conclusion not by looking into the possible messages business send by joining in boycotts of Israel but at the language and legislative history of Act 710.

Under Arkansas’s canons of statutory interpretation, we think the Arkansas Supreme Court would read Act 710 as prohibiting purely commercial, nonexpressive conduct. It does not ban Arkansas Times from publicly criticizing Israel, or even protesting the statute itself. It only prohibits economic decisions that discriminate against Israel. Because those commercial decisions are invisible to observers unless explained, they are not inherently expressive and do not implicate the First Amendment.

This makes sense only in a world in which one could look at Mr. Cohen's "Fuck the Draft" jacket or at other protestors from that era burning their draft cards (or bras) and think, "How odd!  I wonder what these gestures are supposed to convey!  Oh well, unless they explain them to me, I guess I'll never know."  And really, what boycott sends a clear message?  When I see a protest, the first thing I do is walk up to someone with a sign (the slogans are often opaque) and ask, "What's going on here?  Why are you protesting."  The FAIR test is not just unfair.  It's absurd.

In any case, Judge Kelly's dissent makes mincemeat of the majority's selective account of the legislative intent, which was clearly directed at expressive conduct. "[T]he Act implicates the First Amendment rights of speech, assembly, association, and petition recognized to be constitutionally protected boycott activity."

But wait, what of the compelled speech that the certification entails?  Well, that's just incidental to the permissible regulation of non-expressive conduct.  Nobody is holding a gun to the would-be contractors' heads.  They don't have to sign anything.  It's just that if they don't certify their love for Israel, they can't compete for a state contract.  Even I, who thinks our First Amendment jurisprudence is dumb, can see that Arkansas main goal is not commercial regulation but to use its economic power (the power of contracts!) to chill free expression.

An aside.  Act 710, like its counterparts in other states, defines “boycott of Israel” to include any actions "intended to limit commercial relations with Israel, or persons or entities doing business in Israel or in Israeli-controlled territories . . . ” (emphasis added).  The "Israeli-controlled territories" are not Israel.  If they were, then there would be 5.3 million Palestinians entitled to Israeli citizenship.  That ain't happening.  The "Israeli-controlled territories" are occupied territories.  Boycotting the occupation is not a boycott of Israel.  These state acts punish entities not for boycotting Israel but for boycotting the occupation.  There's a huge difference.  Ask Ben & Jerry's, which is subject to divestment actions by Arkansas and other states for its refusal to sell its products in the occupied territories.  But Ben & Jerry's has remained committed to selling its products in Israel.  

The inclusion of the language about the "Israeli-controlled territories" is, in my view, conclusive proof that Act 710 is not an economic measure.  It is a political measure and compelled compliance with the state's political stance on the Israeli occupation violates the First Amendment.  Even if I did not think Act 710 violated the First Amendment, I would still find it preposterous that any U.S. state would blur the lines between support for Israel and support of the occupation.

[Allegedly] Corrupt Government Contracts in Oklahoma

As reported here on nondoc.com, Oklahoma's Department of Tourism and Recreation has cancelled its contract with Swadley’s Foggy Bottom Kitchen, which provides food service in Oklahoma state parks “due to suspected fraudulent activity and questionable business practices.”  More specifically, in its termination letter, the Department noted that Swadley's seemed to be engaged in "highly questionable billing, invoicing, and record keeping practices."

Swadley's insists that it has done nothing wrong and that it has cooperated with state employees all along . Swadley's cause was not furthered when a 2018 video surfaced in which Swadley's founder Brent Swadley states, “I bootlegged barbecue. I wouldn’t be where I’m at today if I followed by the rules and satisfied all the permits and all the legalities and stuff out there. Sometimes you’ve just got to go out there and do it and don’t worry about it.”

Swadley's won the contract to provide food services in Oklahoma's state parks after a bid procedure in which it was the only bidder, and the reporting suggests that the terms of the contract changed significantly in Swadley's favor after it was awarded the contract.  Swadley's was allegedly paid $17 million in management fees and renovation costs, and there are suggestions that the  Department had not engaged in adequate oversight.  Swadley's was paid $1.3 million in management fees alone, a marked increase from the $0 paid to previous operators.  

In the meanwhile, the state is scrambling to provide food service and catering in its state parks.  You do not want to be around a hungry Oklahoman who can't find a barbecue joint.

Sid DeLong on Restitution and the Case of Andrew Cuomo

More Restitutionary Pitfalls for Aspiring Authors (Who Serve in Government)

Sidney W. DeLong

A recent dispute involving the former Governor of New York raises interesting questions about disgorgement as a remedy for breach of fiduciary duty by government officials. It also dramatically illustrates the financial risks that liability for disgorgement poses to defendants who may not have realized that they were acting wrongfully and who have received and disposed of funds before learning that they must turn them over to the plaintiff.

Disgorgement is often the only effective remedy in cases in which a breach of fiduciary duty causes harm to the plaintiff that is difficult to prove or impossible to calculate, making an award of compensatory damages measured by the plaintiff’s loss unfeasible. If plaintiff can prove that defendant was enriched by the breach, the defendant must disgorge to the plaintiff any net gains it obtained as a result of the breach, regardless of their source. Such a claim for disgorgement is entirely unrelated to any harm the plaintiff may have suffered from the wrongdoing and may give plaintiff a windfall. But disgorgement of the wrongdoer’s entire gain from the breach is thought to be necessary to prevent defendant’s unjust enrichment from the wrong and has the virtue of completely removing the incentive for wrongdoing. The same rule applies to breaches of statutory duties and other tortious wrongs.

An earlier post suggested the potential liability of John Bolton for disgorgement of the proceeds of his book, In the Room Where it Happened, on the theory that his publication of the book violated federal law and his employment contract with the government. 

Perhaps inspired by Bolton’s dispute, as reported in The New York Times, the State of New York has recently announced that it will seek disgorgement of the proceeds of former Governor Andrew Cuomo’s book American Crisis: Leadership Lessons from the Covid-19 Pandemic on the grounds that, in obtaining legally-necessary permission from the Joint Commission of Public Ethics (JCOPE) to publish the book, Cuomo wrongfully failed to disclose that he had illegally used government resources, including employee time, to produce the book.  Cuomo denies wrongdoing and says that publication was not wrongful because he received permission from the Commission for the publication. The State seeks recovery (disgorgement) of all amounts paid or to be paid to Cuomo by his publisher.

According to news reports, Cuomo received an advance of over $3 million with $2 million more to be paid over the next two years. The latter payment is unlikely to come due because of poor sales of the book. Cuomo’s attorneys have stated that after payment of expenses and taxes, he donated $500,000 of the proceeds to charity and placed the $1.5 million remainder in a trust for his children.

As an accounting detail, disgorgement usually reaches only the net amount of unjust enrichment after deducting the wrongdoer’s out of pocket costs of obtaining it. But the amounts that Cuomo claims to have spent on income taxes should not reduce his duty to disgorge the entire sum. If he is forced to disgorge the publisher’s pre-tax payment his only remedy is to file an amended tax return and seek recovery of the tax overpayment from the U.S. Government. Of course, he would be required to disgorge the amounts of his gifts to charity and to his children’s trust.

In cases such as Cuomo’s in which the defendant’s violation of law is unclear or unintentional, disgorgement may seem draconian, conferring a windfall on the plaintiff out of proportion to any harm it may have suffered and sandbagging defendant with unexpected liabilities that it may be in no position to pay. This is a stiff price to pay for the deterrent

Restitutionary claims over identifiable proceeds of wrongdoing may sometimes even reach beyond the wrongdoer to innocent transferees of the proceeds. If Cuomo is unable to pay back the full $3 million, the State may seek to claw back the money from the charity or the children’s trust, using the legal theory of fraudulent conveyance. These claims seem unlikely to succeed, however, because there is no indication that the transfers were made to hinder, delay, or defraud Cuomo’s creditors. But if Cuomo becomes insolvent, his bankruptcy trustee might be able to recover the payments as fraudulent transfers without having to prove that they were made with such intent.

As cautionary tales for government-employed authors, the Bolton and Cuomo cases can be distinguished. Assuming in each case that the government’s allegations are correct, Bolton’s wrong was in breaching his statutory and contractual duties of pre-clearance and non-disclosure, security breaches that could potentially harm the government in ways that were incalculable. As in Snepp, disgorgement of all the author’s gains from such breaches was the only feasible remedy.

By contrast, Cuomo’s initial wrong seemingly consisted only in misappropriating or misusing government resources for his private benefit, trivial misbehavior that  harmed the government in ways that are easily calculable by reference to the wages of governmental employees and the costs of office supplies.

However, JCOPE’s main complaint is that his concealment of this misuse might also have constituted an ethical breach or even a breach of fiduciary duty. This would have breached his legal duties as governor as well, in which case, perhaps New York did not ask for enough. It is, after all, it is hornbook law that a faithless fiduciary forfeits his fee in addition to any profits he may have made by breaching his trust. See Restatement (Third) Restitution § 43. The theory is that the fiduciary did not earn the compensation because he did not fulfill his duties. On this theory, attorneys have forfeited their legal fees when they breached duties to their clients. One can see great revenue-raising potential in an aggressive use of this theory. Perhaps the State of New York should seek restitution of the salary and benefits of every state official who has been shown to breach his or her fiduciary duty to the State.  It’s not likely to happen, but if it does, remember you read it here first!

Trump Organization Sues New York City for Breach of Bronx Golf Course Contract

Soon after the January 6th assault on the Capitol Building in Washington, DC,  New York City attempted to terminate contracts with the Trump Organization to operate two ice skating rinks and a carousel in Central Park (left).  It seemed like that would result in an early end to the ice skating season during a pandemic.  New York parents were desperate for ways to divert their children and fend off boredom.  They delighted in an opportunity to ponder whom they found more despicable: their former President or their current mayor. The City blinked on that one.  Those contracts with the Trump Organization were due to lapse in April in any case, so the City chose to let them run their course and not renew them.

Now, according to the New York Times, the Trump Organization is suing New York City for allegedly wrongfully terminating a 20-year contract the organization had with the city. The lawsuit centers around the city-owned course in the Ferry Point section of the Bronx, called Trump Golf Links at Ferry Point. The Trump Organization was in the sixth year of operating the course since its opening in 2015.  

The Trump Organization alleges  that “Mayor de Blasio had a pre-existing, politically-based predisposition to terminate Trump-related contracts, and the city used the events of January 6, 2021 as a pretext to do so.” A spokesman for the mayor, Bill Neidhardt, responded, saying: “Donald Trump directly incited a deadly insurrection at the U.S. Capitol. You do that, and you lose the privilege of doing business with the City of New York.”  Oooh.  That's a new wrinkle on a morals clause!

Actually, the mayor's spokesman should leave the lawyering to the lawyers.  They claim that the Trump Organization defaulted on its contracts when it failed to attract a major tournament to the course.  It is unlikely to do so in the future. The woke PGA has recently announced it would no longer be allowing a Trump-owned course in New Jersey host one of its major Tournaments.

The Trump organization claims it had no obligation to attract a major tournament. Rather, its only obligations was to maintain “a first class tournament quality daily fee golf course.”  It's legal papers include statements from professional golfers, including Dustin Johnson and Bryson DeChambeau, describing the course as “tournament quality” and  “first class.”  Not bad, but if they really wanted to impress, they should have characterized the course as "astonishingly excellent".

Thanks to ContractsProf Blog Intern, Sydney Scott, for her research assistance!

Guest Blogger Marissa Jackson Sow on Whiteness as Contract and the Police, Part II

Whiteness as Contract as a Framework for Understanding America’s Police Problem

Marissa Jackson Sow 

Part Two: Using Contract Theory to Analyze the Gap Between Expectations of Police and Police Performance        

Breaches of America’s racial contract do not go unpunished: in early June 2020, the entire world got multiple glimpses of the New York City Police Department’s violent backlash against racial justice protests. As guardians of that contract, the police used Mayor Bill de Blasio’s 8pm curfew as a means to harass, provoke, brutalize, and ultimately terrorize New Yorkers—including those, who, like my husband, had to report to work in the City after 8pm. One particularly brutal attack on peaceful protesters in the South Bronx, where we lived, on June 4 was the subject of a damning Human Rights Watch report, which concluded that the police department had planned the attack on the protesters, who were primarily Black and Latinx. My family and I left New York City, thoroughly traumatized, a few days thereafter. 

On the third night of the curfew, officers in riot gear descended upon peaceful protesters in Crown Heights, Brooklyn at approximately 11pm, tackling and detaining them. After most of their vehicles departed, one remained behind, unable to start, as the crowd began to jeer them. Once the vehicle started, the police gave the crowd the middle fingers and drove off, playing the ice cream truck song, which is titled “N****r Love a Watermelon. Ha! Ha! Ha!” The incident was captured on video and posted to social media. Police allegedly played the song out of their cruisers unprovoked in historically Black neighborhoods for weeks thereafter.

Months later, more bizarre activity from the NYPD was captured on a recording device and, again, posted to a social media platform. In advance of the 2020 general elections, officers were recorded playing pro-Trump propaganda out of a police cruiser in predominantly Black Flatbush, Brooklyn. Such activity is a flagrant violation of the official NYPD code of conduct. The theory of whiteness as contract provides guidance, pointing to the invisible common law that governs police interests and behavior—anti-discrimination laws, police department codes of conduct, and the formal terms of police officers’ employment contracts notwithstanding.

Contracts are, of course, about expectation, agreement, and performance, and such is the case whether discussing commercial contracts or social contract theory. People do not call upon the police in the hopes that the police will shoot them to death. Underlying any request for police assistance is the understanding of a contractual agreement between citizen and police that because of the taxes one pays into local government: the agreement is that citizens fund the police, and that in exchange, the police will protect and serve them. A contracts-based analysis reveals why and how this reasoning fails to translate into reality in American society vis-à-vis Black (defined here as all people of African descent, including Latinx peoples) and Indigenous (defined here as American Indian and Latinx) communities. Here, I consider policing using the concepts of unconscionability, mutual assent, and promissory estoppel.

Calling upon the police assumes membership in America’s social contract; however, Whiteness as contract definitionally excludes Black and Indigenous people therefrom. Expectations by Black and Indigenous community members that the police work to protect and serve them because they pay police salaries with their tax dollars reflects the commonly-held expectations of the American public with respect to their public and civil servants—expectations that actually only apply to members of a body politic from which Black and Indigenous people are forbidden entrée, though they are formally members of that contract under public law.

The state not only accepts the tax dollars of Black and Indigenous people—allocating a portion of those dollars to law enforcement budgets—but actually requires that Black and Indigenous people pay their taxes as a condition of their formal membership in a social contract. The promise that the United States makes to its citizenry is that police will not deprive them of their due process rights, and that where such rights are violated by officers acting under the color of law, the citizens must be able to seek remedies from the state. Given that police are usually able to harass, torture, and kill people of color with impunity, on salaries funded by their victims, even the formal social contract should be considered unconscionable. The state forces Black and Indigenous people to participate in a bargain, extracting tax dollars for them in exchange for police services, knowing that those police services are actually intended to cause them harm.

The presence of the racial contract—that invisible common law that nullifies the formal American social contract, and which relies upon the forcible extraction and expropriation of Black and Indigenous peoples’ resources in order to create and protect white wealth—totally undermines Black and Indigenous people’s formal expectations of law enforcement. Black and Indigenous communities expect equal assistance and service from police, as per their formal rights under law, and in exchange for their tax dollars; the state gaslights them into believing that such a contract is intact. However, the state actually uses police to contain, suppress, and eliminate Black and Indigenous people—in order to perpetuate the racial contract and the system of racial capitalism for which the racial contract exists. The State—which represents the white body politic—knows that it has promised certain benefits of citizenship to all citizens and knows that Black and Indigenous citizens rely upon the promise, while also knowing that it has absolutely no intention of delivery thereof. Because there is no mutual assent between the parties, no contract actually exists.

As guardians of America’s racial contract, the police work to ensure that Black and Indigenous people stay in their physical and socio-political place; facilitate extraction and seizure of capital from Black and Indigenous people from the state; and remedy perceived breaches of white supremacist social order. On June 25, 2020, for example, news broke of the firing of three Wilmington, North Carolina police officers who were caught on a two hour-long video accidentally recorded in a patrol car making intensely racist anti-Black statements and threats. One declared that “We are just going to go out and start slaughtering them fucking n*****s.” He also suggested that he or others should “Wipe [Black Americans] off the fucking map...that’ll put ‘em back about four or five generations.”Another deplored, in response, that white people had begun “worshiping blacks”.

Photo by Tony Webster

Thus, with each police killing of a Black or Indigenous American comes increased calls for police reform or abolition. Serious calls to defund the police are now part of mainstream political lexicon, as Black and Indigenous people realize that the state is actually compelling them to pay for their own murders, or the murders of their families, friends, and neighbors. Many members of these communities realize that their privity with the police—and with the state—is illusory, and that they are not contractors, but rather the subjects and objects of the contract itself.

Communities targeted by police brutality have a right, per the doctrine of promissory estoppel, to seek remedies from the state based on their reliance upon an agreement that the police would protect and serve them in exchange for their municipal funding. Abolitionists can base an argument for reparatory justice based upon the reliance doctrine: indeed, should they be able to make a case for detrimental reliance of a community upon a contract with the local police department, a claim could theoretically be made of a municipal government for damages that would then be subtracted from the police department’s budget. Otherwise, the affected community that could demonstrate reliance and breach, and certainly that the state has made vitiating misrepresentations regarding the police’s duties to protect and serve Black and Indigenous people. Thus, the non-breaching party could demand rescission of the agreement and opt to stop funding the police. Of course, the state would have to agree to this demand, and in order for that to happen, the state must first rescind the racial contract and include Black and Indigenous people as contractors—and, thus, as full citizens, and as people with rights that the police are bound to respect.

This post is part of a continuing series on introducing critical perspectives, including critical race theory, into the teaching of first-year contracts.  Other posts in the series include:

• Guest Blogger Marissa Jackson Sow on Whiteness as Contract and the Police, Part I
• Teaching Assistants: Marissa Jackson Sow, "Whiteness as Contract"
• Teaching Assistants: Threedy, Dancing Around Gender
• Guest Post by Alan White, Systemic Racism and Teaching Contracts
• Guest Post by Deborah Post on Williams v. Walker-Thomas
• Guest Post by Chaumtoli Huq, Part III: Counter-Hegemonic Narratives
• Guest Post by Chaumtoli Huq, Part II: Freedom to Contract and the Reasonable ManGuest Post by Chaumtoli Huq, Part I: The Decolonial Framework
• Guest Post by Deborah Zalesne, The (In)Visibility of Race in Contracts: Thoughts for Teachers
• What Should a Court Do in Response to Racist Contractual Threats? Wolf v. Marlton Corp.
• Guest Post by Charles Calleros: Raising Issues of Race, Ethnicity, and Culture in 1L Contracts: Language Barriers
• Guest Post by Charles Calleros, Talking about Race in the Contracts Course: Interface with Civil Rights Laws, Part II – Consideration
• Guest Post by Charles Calleros, Talking about Race in the Contracts Course: Interface with Civil Rights Laws, Part I – Mutual Assent
• Teaching Assistants, Emily Houh's Redemptive Theory of Contract Law

Virtual Symposium Part IV: Mark Weidemaier and Mitu Gulati on Covid and Sovereign Defaults

Covid-19, Sovereign Defaults, and the Doctrine of Economic Necessity
Mark Weidemaier & Mitu Gulati

The economic devastation caused by the Covid-19 pandemic is global, but the effects are magnified in poorer countries. There is an urgent need to divert resources away from debt service and towards pandemic mitigation. Countries that mostly owe money to official lenders—i.e., the poorest countries—can get some short-term relief courtesy of the Debt Service Suspension Initiative (although few have taken advantage of this opportunity). But countries with significant private-sector debts—especially the so-called emerging markets—are in a different kind of bind. Tourism revenue, remittances, tax collection… all are down sharply, while spending needs have increased. Even a small contraction in global liquidity will push many countries into unsustainable debt situations. Some are already there.

Unfortunately, no mechanism exists to coordinate the orderly restructuring of debts on this scale. Official creditors can coordinate their response to a debt crisis—not without friction, but with relative ease. Not so for dispersed private creditors. Here, the restructuring landscape consists of flawed contractual mechanisms that require each country to negotiate restructuring terms with creditors with diverse incentives, debt instruments, and legal rights. It is a recipe for disaster. Lawyers and financial advisors will do well; everyone else will suffer.

We start from the premise that, as in bankruptcy, a stay on creditor enforcement activity will reduce the chaos surrounding restructuring talks. More important, in the present context, a stay will allow countries to divert funding to deal with the combined economic and health crisis of the pandemic. A stay may not prove necessary; most private creditors would prefer not to be seen suing a country mired in a pandemic. But creditors are heterogeneous and, as time goes on, cohesion will break down. When this happens, is there a legal basis for imposing a stay?

One possibility is the doctrine of economic necessity. This is a doctrine of customary international law and might have purchase in jurisdictions that generally incorporate international law dictates into domestic law, such as the United States and United Kingdom. As a caution, sovereigns have occasionally raised economic necessity in prior debt cases, almost always without success. And to our knowledge, the doctrine has never been successfully asserted in a U.S. or U.K. municipal court (and the courts and law of New York and England are the ones that matter for almost all emerging market foreign borrowing). Indeed, because the defense evolved in the context of “international obligations,” it is not even clear that the doctrine excuses non-performance of private contractual obligations of the sort that concern us here. But there is reason to think these problems can be overcome and that the defense might be available in the present context (discussed in this paper).

Under Article 25 of the International Law Commission’s (“ILC”) draft Articles on Responsibility of States for Internationally Wrongful Acts, a state may invoke necessity to excuse its non-performance of an “international obligation” if non-performance is the only way to address “a grave and imminent peril,” as long as non-performance does not seriously impair an essential interest of the “State or States towards which the obligation exists.” As the wording suggests, the scope of the doctrine is narrow. The peril must be grave and must outweigh the risks to other states. Even then, a state may not invoke necessity to excuse the violation of an international obligation that “excludes the possibility of invoking necessity.” Nor, for that matter, may it invoke the defense if has contributed to the state of necessity. Finally, non-performance is excused only while the threat persists. The state must resume performance when the crisis ends, and it may have to pay compensation.

Local mismanagement has contributed to almost every sovereign debt crisis in our lifetimes—probably to every sovereign debt crisis there has ever been. So one might think that the necessity defense would never be available (in much the same way that borrowers are essentially never able to raise the contract law excuse of impracticability). This has mostly been the reaction of tribunals when a sovereign has raised necessity in the context of a debt default.

As we understand these decisions, they are primarily concerned with the difficulty of verifying the existence of a state of necessity. Tribunals understand that a doctrine that excuses nonperformance also creates room for opportunism. How can judges or arbitrators tell whether conditions in a debtor state are so bad that failure to ameliorate them will cause a humanitarian disaster? How can they tell whether the debtor state is blameless for the conditions? If tribunals cannot accurately answer these questions, their errors will disrupt the smooth functioning of debt markets. And in the cases thus far, the tribunals have not been confident of the answers, and the defense has failed.

But the Covid-19 pandemic may be the exception. It is hard to blame any emerging market nation for the economic and humanitarian fallout of the pandemic. To be sure, some have worsened the situation (as have some very rich countries). And there is always second guessing of government policies. But in most or all cases, the pandemic itself will swamp other contributing factors. Moreover, unlike in other settings, here there is reason to think that official sector actors can effectively certify that a state of necessity exists—this is the clear implication of the G-20’s Debt Service Suspension Initiative, and the official sector can take other steps to make clear that there is an international consensus to this effect. These steps should ease concerns about the verifiability of the present state of necessity. Likewise, their absence in future cases will provide an easy way for tribunals to limit the precedential value of recognizing the necessity defense in the context of Covid-19.

We do not mean to suggest that the defense will be available to every country. Nor will every country wish to make the argument. However, for those in dire need, who want to avoid a debt default, this could be an option. A related argument—although not the defense itself—has been raised in a U.S. sovereign debt case involving Venezuela, Casa Express v. Republic of Venezuela. Perhaps the case will shed some light on the applicability of the doctrine in the U.S. But if a sovereign state must choose between paying international creditors or paying for a vaccine, the case for a necessity defense strikes us as clear. In such cases, the sovereign’s non-payment should be excused during the period of necessity, and bondholders should not be allowed to use non-payment as a basis for accelerating the debt.

A week or so ago, we discussed the doctrine of economic necessity with Eric Posner on our Clauses and Controversies podcast. Rightly, we suspect, he cautioned that it will be a heavy lift to persuade a municipal court to apply the doctrine. As Eric pointed out, the doctrine is vague with undefined contours. And no judge in these two jurisdictions wants to take steps that might devalue their status as financial capitals. One implication is that judicial decisions may be heavily shaped by the views expressed by the U.S. and U.K. governments. (We suppose it would also help if government officials cared about the real domestic economy and about people in poorer countries. Also: we each want a pony.)

A final note: As others have pointed out, there are other legal techniques that judges have used to deal with related situations. Dave Hoffman and Cathy Hwang discuss a fascinating set of public health cases from the late 1800s and early 1900s (here and discussed in this previous post; and also listen to the Hoffman & Wilkinson-Ryan podcast on the Hanford baby exhibition here, discussed in this previous post). Jonathan Lipson looks to the equally interesting depression era cases, some of which directly deal with our favorite topic of sovereign debt contracts (here).  And Emily Strauss has written about courts taking fairly radical steps in reforming certain contracts in the aftermath of the 2007-08 crisis (here).

Unconstitutional Contractual Relations? The Emoluments Clause and In re Trump

Pictured at left is the building now known as the Trump International Hotel in Washington, DC, but this photo is from 1911, back when the building housed the post office.  Contractual relations relating to this building are at the heart of  In re Trump, in which the Fourth Circuit, sitting en banc this week denied the President's petition for a writ of mandamus ordering the district court to permit an interlocutory appeal from its refusal to dismiss the case.

Maryland and the District of Columbia brought the suit, claiming that the President's ownership of the hotel, through a business that he controls, violates the Constitution's Foreign Emoluments Clause (Article I, § 9, cl. 8) and the Domestic Emoluments Clause (Article II, § 1, cl. 7).   The heart of the allegations (from the Amended Complaint) run as follows:

President Trump, acting through companies he owns or controls, has violated both the Foreign Emoluments Clause and the Domestic Emoluments Clause by receiving millions of dollars in payments, benefits, and other valuable consideration from foreign governments and persons acting on their behalf, as well as federal agencies and state governments. His repeated, ongoing violations include remuneration derived from: (a) leases of Trump properties held by foreign-government-owned entities; (b) purchase and ownership of condominiums in Trump properties by foreign governments or foreign-government-controlled entities; (c) other property interests or business dealings tied to foreign governments; (d) hotel accommodations, restaurant purchases, the use of venues for events, and purchases of other services and goods by foreign governments and diplomats at hotels, restaurants, and other domestic and international properties owned, operated, or licensed by President Trump; (e) continuation of the General Services Administration lease for President Trump’s Washington, D.C. hotel despite his breach of the lease’s terms, and potential provision of federal tax credits in connection with the same property; and (f) payments from foreign-government-owned broadcasters related to rebroadcasts and foreign versions of the television program “The Apprentice” and its spinoffs. Moreover, President Trump, by asserting that he will maintain the interests at issue, is poised to engage in similar constitutional violations for the duration of his presidency.

The President challenged that suit on various grounds, and the District Court granted the President's motion to dismiss (on standing grounds) as to properties other than the Trump International Hotel in Washington, DC.   The President sought certification for an interlocutory appeal of the district court's decision, which the court denied.  The President than petitioned the Fourth Circuit for a writ of mandamus that would force the district court to allow the case to proceed.  A Fourth Circuit panel not only granted the mandamus petition but ordered the suit dismissed for lack of standing. 

This week's en banc opinion reversed the panel, stressing the extraordinary nature of mandamus relief as a mechanism for challenging a decision within the discretion of a district court.  The majority opinion clearly will not be the last word.  It merely states that, even if the district court's decision to deny the President an interlocutory appeal was clearly erroneous, that error would not justify the grant of a writ of mandamus.  The standard is abuse of discretion, and the district court, even if its decision was incorrect, did not abuse its discretion. The majority acknowledged that the District and Maryland raise novel claims as to standing and as to the ability of courts to imply an injunctive remedy without statutory authorization.  However, the majority did not view those claims as so tenuous as to justify summary dismissal.

But here on the ContractsProf Blog, we are more interested in the District and Maryland's  substantive claims, and it is to be hoped that the district court at least will eventually address the merits of those claims.  It would be nice to know if the Emoluments Clauses are an actual limit on a President's ability to enter into contractual relations with foreign governments or with U.S. governmental agencies.  This issue becomes more acute during the current economic crisis.  The Trump Organization has sought relief from the Trump Administration on its $3 million lease for the Trump International Hotel.  I understand that there are issues of standing and the enforceability of the Emoluments Clause through the courts, but it is hard to read my preceding sentence and not think o tempora o mores!

Unfortunately, it seems that the barriers to getting a judicial answer to the questions at the heart of this case may be insuperable.  In any case, with the en banc court sending the case back to the district court, more than three years into the litigation, we are still pretty much at square one.  The answer may be that the plaintiffs don't have standing or courts cannot invent a remedy where the Constitution does not provide one.  Or the case might become moot because we have a new President before the case can be decided.

Case reminds us to pay for the insurance if you want recovery for a lost package

My students are always asking me about misdelivered packages, so I read this recent case out of the District of Oregon, Mansfield v. Leigh, Case No. 6:19-cv-00254-MK (behind paywall), with interest. It's a fairly straightforward case about a lost package, and a fairly straightforward analysis of your options for recovery if a package goes missing. The plaintiff was seeking over a thousand dollars in damages for the lost package, but the court finds that her recovery was limited to the fifty dollars of insurance she purchased (she actually received slightly more because the post office also refunded her service charge). 

This case is a reminder to take the postal insurance seriously. I once had a package go missing and I had insured it but not nearly for the value of what went missing. That was all on me, and I've taken that insurance situation seriously ever since. 

Border Wall Contractual Dispute

The loser of a bid to build part of Trump’s border wall has protested the bidding process leading to a rival winning the $1 billion contracts.  A complaint has been filed with the Government Accountability Office, which now has 100 days to resolve the complaint.

At issue is a questionnaire which asked what previous work any bidder had completed on the border wall within the last five years, which narrowed the qualifying bidders to just two firms. In effect, argues plaintiff Fisher Sand & Gravel, the process used by the United States Army Corps of Engineers suppressed competition by designating only two firms as sole source contractors, thus leading to a process where the end result was known ahead of time.

The construction of the highly controversial wall will thus be delayed.  Of course, everyone must observe the law, including government agencies. Contractual bidding processes involving no less than one billion taxpayer dollars should arguably be subject to particularly close scrutiny. 

An employer isn't bound by a policy unless the employee is aware of and relies upon the policy (e.g., reads the handbook!)

A recent case out of Illinois, Brown-Wright v. East St. Louis School District 189, NO. 5-18-0311 (behind paywall), finds that in order for an employee policy to operate as a binding contract, the employee has to have read the policy.

In the case, the plaintiff was suing based on an alleged violation of the sick leave payout policy. The plaintiff, however, did not find out about the policy her case was relying upon interpreting until after her employment ended. Therefore, it was not the case that she learned of the policy and continued to work as acceptance of and consideration for that policy. Because the plaintiff did not read the policy before terminating employment, she could not rely upon it now. 

This is a lesson to all of us to read those policies our employers send around. 

Texas court finds economic development corporations don't receive governmental immunity from suit

A recent case out of Texas, Rosenberg Development Corp. v. Imperial Performing Arts, Inc., No. 17-0660, tackles the question of whether economic development corporations are protected by the sovereign immunity doctrine, concluded that they are not. Interesting for its analysis of how to treat economic development corporations in this breach of contract suit. 

You and your corporate entities: often a complex story with repercussions

I got really excited when I saw this case because it's always nice to have a recent parol evidence case to look at, and this one involves movies!

It's a recent case out of Mississippi, Rosenfelt v. Mississippi Development Authority, No. 2017-CA-01120-SCT (you can listen to the oral arguments here). The MDA had communications with Rosenfelt regarding his movie studios' attempt to make movies in Mississippi, eventually guaranteeing a loan through a term sheet signed by the MDA and by Rosenfelt on behalf of his two movie studios. When Rosenfelt wanted to make another movie and applied for another loan under the terms of the agreement, the MDA turned down the request. Rosenfelt then sued for specific performance and damages. Rosenfelt initially triumphed on a motion for partial summary judgment but then, during the specific performance debate in the case, the MDA filed a summary judgment motion challenging Rosenfelt's standing, which resulted in dismissal of Rosenfelt's complaint. 

Rosenfelt appealed, alleging that there was an agreement between him personally and the MDA. However, the court noted that all communications from the MDA were directed explicitly to Rosenfelt as president of the relevant movie studio. The court's decision came down to contract interpretation: All of the written documents in the case unambiguously referred to Rosenfelt in his official corporate capacity or were signed by Rosenfelt in his official corporate capacity. Given the lack of ambiguity on the face of the documents, the court refused to consider parol evidence as to whether Rosenfelt was personally a party to any of the agreements.  Because all of Rosenfelt's allegations concerned his personal agreement with the MDA, the court dismissed the suit. 

This case serves as a reminder that, once you have set up corporate entities, you need to be careful to remember how those corporate entities impact not just your legal liabilities but also your legal rights. 

Passport Issuance Not a Contractual Activity

Perhaps unsurprisingly, the Seventh Circuit Court of Appeals has held that a nation state issuing a passport to one of its citizens cannot be sued for breach of contracts or a tort, for that matter.

Chinyere Nwoke sued the a consulate of Nigeria after paying $500 for passports for her and her son that she never received.  Arguing breach of contract, the district court dismissed her claim under the Foreign Services Immunity Act.  On appeal, Ms. Nwoke invoked the exception for acts “based upon a commercial activity.” 

A foreign state is immune for federal jurisdiction for its “sovereign or public acts,” but not its acts that are “private or commercial in nature.”  Ms. Nwoke argued that the consulate’s actions were commercial because it was “making a profit from a fraudulent activity” (presumably charging for passports never actually issued).  However, courts do not consider a nation state’s motivation in determining whether an activity is sovereign or commercial.  Because private persons cannot issue passports, the consulate’s activities were of a sovereign nature and immunity thus applied.

This case makes sense, but is of course nonetheless unfortunate for Ms. Nwoke, whose only channel of complaint now seems to be to the government of Nigeria; a case of complaining to the very wrongdoer that oversaw the wrong. Government corruption remains a serious issue around the world.  

The case is Nwoke v. Consulate of Nigeria, 2018 WL 3216888

Trump Seeks to Alter Post Office Contracts with Amazon

As widely reported in, for example, the Washington Post, whose owner founded Amazon, President Trump has pushed Postmaster General Megan Brennan to double the rate that the post office charges Amazon.com and some, but not all, similar online retailers.  

The contracts between the Postal Service and Amazon are secret out of concerns for the company's delivery systems.  They must additionally be reviewed by a regulatory commission before being changed.  That, perhaps unsurprisingly, does not seem to phase President Trump who appears to be upset at both Amazon and the Washington Post.   The dislike of the latter needs no explanation, but why Amazon?  Trump has accused it of pushing brick-and-mortar stores out of business.  Others point out that if it weren't for Amazon, it is the post office which may be out of business.

Aside from the political aspects of this, does Trump have a point?  Is Amazon to blame for regular stores going out of business?  I am no business historian, but it seems that Amazon and others are taking advantage of what the marketplace wants: easy online shopping.  Yes, it is very sad that smaller, "regular" stores are closing down, most of us probably agree on that.  But retail shopping and other types of business contracting will evolve over time as it has in this context.  That's hardly because Amazon was founded; surely, the situation is vice versa.  Such delivery services are fulfilling a need that arose because of other developments.

From an environmental point of view, less private vehicle driving (for shopping, etc.) is better.  Concentrating the driving among fewer vehicles (FedEx, UPS, USPS, etc.) is probably better, although I have done researched this statement very recently.  One fear may be the additional and perhaps nonexistent/overly urgent need for stuff that is created when it becomes very easy to buy, e.g., toilet paper and cat litter online even though that may in and of itself create more driving rather than just shopping for these items when one is out and about anyway, but that is another discussion.

Suffice it to say that Trump should respect the federal laws governing the Postal Service _and_ existing contracts. What a concept!  If the pricing structure should be changed, it clearly should not be done almost single-handedly by a president.  

Meanwhile, the rest of us could consider if it is really necessary to, for example, get Saturday snail mail deliveries and to pay only about 42 cents to send a letter when the price of such service is easily quadruple that in other Western nations (Denmark, for example, where national postal service has been cut back to twice a week only and where virtually all post offices have been closed).  Fairly simple changes could help the post office towards better financial health.  This, in turn, would help both businesses and private parties.  

 

We *think* there's an NDA. Or is there?

Someday I will blog about things other than NDAs again but I feel like every time I open the internet there's another story about an NDA. Everyone today was talking about last night's interview of Stormy Daniels on Jimmy Kimmel Live!, which was a bizarre series of answering-questions-with-questions and playing coy and talking around the main issue, which was her alleged affair with Donald Trump in 2006. You can find lots of articles online; here's one that lays it out. Those trying to summarize the interview generally seem to assume that Daniels must be restricted by an NDA, because she could say if there wasn't an NDA, but it's the proving of a negative, basically; the reporters are trying to make sense of the blank space the non-answers leave in their wake. 

It's all had me wondering about the role NDAs played--or maybe more importantly, didn't seem to play?--during the Clinton impeachment. Lots of details about Clinton's sexual harassment history came out during the impeachment, and from my brief research into it, it doesn't seem like there were any NDAs in play. Does anybody have other information about this? How do the number of NDAs around Trump in play today shift our perspective, conversation, and legal analysis?